Have you heard of the options trading? Oh, you have. Interested in it and wanna know tips and strategies that will help you in making a good profit? Then you’re in the right place. In this article, you will learn some tips that will help you in improving your skills as an options trader.
So, first things first.
What are the options and options trading?
Let’s keep it clear and concise. An option is a contract that comes with an expiry date. Yup, you heard it right. They sound similar to future contracts but that is not the case they are highly different from one another. You will not know the underlying price of the stocks involved in a particular options contract. So the closer you get to the expiry date the lower the price of your contract gets. Since you don’t own the stocks, the promise will be to pay the difference between the present stock price and future stock price. However, the buyer has the right to buy but they’re not obligated.
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Many people think options are highly risky and complicated. However, that is far from the truth. The options are the best way for you to gain exposure to stocks. Agreed that they’re a bit difficult to understand. But if you understand the basic characteristics then you will see how simple and beneficial they’re.
So without any further ado let’s jump into the tips and strategies.
Basics are important
Before you start anything you must have clear knowledge about the basis of the options trading. Why? The fundamentals have an impact on you choosing a stock. Yup, you have heard it right. A trader with basics and without them is quite different. When you know fundamentals you will be able to easily differentiate between companies that are good investments or not. When you lack the fundamentals you will not be able to differentiate between a good and bad investment. If your judgment is wrong you may end up losing a huge deal of money.
Volatility for your advantage
For any options trader, the volatility in the market should be the most important aspect while making any decision. So if you want to make profits then you must have use volatility to your advantage. Whenever there is low volatility in the market you want to be wary of selling the cheap options. So in such situations, you can use strategies that will increase the volatility.
Some of the strategies that will benefit from an increase in volatility are diagonal spreads, debit, and calendar spreads. In this case of high volatility, you can be wary of purchasing the expensive options. This situation is perfect for selling those expensive options. The strategies that will help you in a decrease of implied volatility include iron condors, strangles and credit spreads.
45 Days is perfect
The expiry date for your options trades also highly matters. If you want to understand options trading time then you must first understand the theta. The meaning of Theta here is the amount of time delay in the position of an option. So whenever you’re selling an option, 45 days is the optimum period. Because at this point the gamma risk is minimized as the theta is maximized. For an option seller as you have already understood time decay is good as it allows them to buy back the options at a cheaper price.
Simply put, by opting to 45 days expiry date you can buy back the options at a cheaper price. Sounds amazing right? People may think that selling the options with the highest theta is beneficial i.e., nearest to the expiration. However, they forget that the increased profit potential will also increase the gamma risk. This is where the option starts moving like a stock. So theta begins to accelerate.
Diversify your portfolio
Diversifying your portfolio is highly beneficial for you. You can diversify your portfolio in three ways i.e., direction, product, and time. Wondering what is the benefit you will receive from diversification? Diversifying your portfolio will result in a concentration of risk. When the risk is concentrated in a single area, if time is not right you may end up losing a lot of money or if your luck is truly bad, you may end up losing everything. The ultimate goal of any trader is to be able to continue trading tomorrow. So if you want to continue trading then diversifying your portfolio will save your account from exhausting.
The diversifying of products means you will trade with different underlying. Trade with different stocks, don’t invest all your money in a single underlying or stock. Diversifying by direction means you should not be having all your directional risk on a single side. Having bullish, neutral, and bearish trades will reduce risk. Lately diversifying by time means it is beneficial to have different expiration cycles. As each of them behaves differently to the change in volatility and stock price.
Patience is key
No matter how many strategies you have and how many tips you have at your disposal. The most important aspect that will help you in bringing good profits home is patience. Don’t you agree? In Options trading, you must be clear-headed and study the market perfectly to make accurate decisions. Sometimes your best judgment may bring you losses because of volatility in the market. In such cases, if you take countermeasures without measuring your risk you may end up emptying your pockets.
So take your time and keep your cool at all times. The major problem with trades is that they feel that they need to constantly keep trading. But the reality is quite different, one solid trade is more likely enough to bring you good profits. So you don’t have to trade every day to bring huge profits. You can study the market every day and strive when time is right to bring home huge profits. So focus on your skills and keep on practicing and you will naturally become best at it.
These are some of the tips and strategies that will help you with options trading. But before anything keep your bottom line. Once you feel like you hit the bottom line. You should stop. Because interesting to continue trading when your bank account is on the decline will do no good for your mental health. So use these tips for option trading and bring huge profits home.